Federal Reserve Chairman Jerome H. Powell spent much of the early pandemic lamenting the things America lost: a job market historically so strong that it was boosting marginalized groups, those people and communities was expanding opportunities for those who had been living without them for a long time.
“We’re very eager to get back to the economy, to get back to a tight labor market with low unemployment, high labor-force participation, rising wages — all those good factors that we had as recently as last winter, ” Mr. Powell said an npr interview In September 2020.
The Fed chairman has got that wish. the labor market has recovered by almost every major measure, and employment rate For people in their most active working years, it surpassed the 2019 high, reaching a level last seen in April 2001.
Yet the biggest risk to that strong rebound has been Mr. Powell’s Fed. Economists have spent months predicting that workers will not be able to maintain their recent labor market gains as the Fed aggressively attacks rising inflation. The central bank has sharply raised interest rates to cool the economy and job market, a campaign that many economists predict could lead to higher unemployment and even plunge the US into recession. Is.
But now an enticing prospect is emerging: Can the US contain inflation and maintain its labor market edge?
Last week’s data showed that price increases have started to moderate gradually, and this trend is expected to continue in the coming months. The long-awaited cooling-off has arrived, while unemployment remains low and hiring remains healthy. This combination is raising the possibility – still not guaranteed – that Mr Powell’s central bank could make a soft landing, with workers largely keeping their jobs and growth slowing, even if inflation moderates. Go
“There are meaningful reasons why inflation is coming down, and why we should expect it to go down further,” said Julia Pollack, chief economist at ZipRecruiter. “Many economists argue that the last leg of inflation reduction will be the most difficult, but that is not necessarily the case.”
Inflation has dropped to 3 percent, only a third from last summer’s high of 9.1 percent. Whereas an index that removes volatile products to give a clearer sense of the underlying trend in inflation higher at 4.8 percentIt’s also showing notable signs of bottoming out — and the reasons for that softness appear to be potentially durable.
Housing costs are slowing among measures of inflation, something economists have expected for months and they widely predict will continue. Prices for new and used cars are coming down as demand eases and inventory on dealer lots improves, driving down item prices. And even services inflation has come down to some extent, though this is partly due to the slowdown in air fares which may look less significant in the coming months.
All of these positive trends could make the path to a soft landing — what Mr. Powell called “the narrow path” — a little wider.
For the Fed, the initial cooling off may mean it may not need to raise rates as high this year. Central bankers are set to raise borrowing costs at their July meeting next week, and have forecast another rate hike before the end of the year. But if inflation remains soft over the next few months, it could allow them to delay or even cancel that move, while indicating that if inflation picks up again Further increases could be made – a sign of what economists sometimes call a “tightening bias”.
Christopher Waller, one of the Fed’s most inflation-focused members, suggested last week that he might support raising interest rates again at the Fed meeting in September if inflation data comes in, but if He may change his mind if progress is seen in the two upcoming inflation reports. Towards slow price rise.
“If they look like the last two, the data would probably suggest a halt,” Mr Waller said.
Interest rates have already been raised – if hiked, they will be in the range of 5.25 to 5.5 per cent as expected On July 26, the highest level in 16 years. Keeping them stagnant would continue to depress the economy, discouraging home buyers, car buyers or businesses hoping to expand on borrowed money.
So far, however, the economy has shown a surprising ability to absorb higher interest rates without cracking. Consumer spending has slowed, but hasn’t declined. The rate-sensitive housing market initially cooled sharply as mortgage rates rose, but has recently shown signs of slowing. And the labor market just keeps throbbing.
Some economists think that with such a high rate of speed, it will prove difficult to contain inflation completely. salary hike looming about 4.4 percent By one popular measure, well above the 2 to 3 percent that was typical in the years before the pandemic.
The reasoning is that with wages rising so quickly, companies will try to charge more to protect their profits. Consumers who are earning more will have the means to pay, keeping inflation higher than normal.
“If the economy doesn’t calm down, companies will need to factor bigger wage increases into their business plans,” said Coco Agbo-Bloua, global research leader at Societe Generale. “It’s not a question of whether unemployment needs to rise — it’s a question of how high unemployment needs to be to get inflation back to 2 percent.”
Yet economists within the Fed have expressed the possibility that unemployment may not need to increase at all to reduce inflation. Mr. Waller, the Fed board economist, says there are plenty of job opportunities across the economy at this point in time, and wage and price increases could slow. argued in a paper the last summer.
Although unemployment could rise further, the newspaper argues that it will not increase by much: perhaps a percentage point or less.
So far, that prediction is playing out. job vacancies Removed Immigration and higher labor force participation have improved the supply of labor in the economy. As equilibrium is returned, wage growth has come down. Meanwhile, unemployment is hovering around the same level it was at 16 months ago when the Fed started raising interest rates.
A big question is whether the Fed will feel the need to raise interest rates further in a world with wage gains that – albeit slowing – remain significantly faster than before the pandemic. It may happen that they do not do this.
“Wage increases often lag inflation, so it’s really hard to say wage increases will bring down inflation,” Mary C. Daley, president of the Federal Reserve Bank of San Francisco, said during a CNBC interview last week.
Undoubtedly, risks still loom over the landscape. The economy could slow still more sharply as the effects of higher interest rates play out, slowing growth and hiring.
An escalation of the war in Ukraine or some other unforeseen event could cause inflation to peak again, prompting central bankers to do more to ensure that price increases are quickly brought under control. Or the hike in prices can prove to be very painful.
“One data point doesn’t make a trend,” Mr Waller said last week. “Inflation to slow down for some time before getting much worse in the summer of 2021.”
But if price increases remain slow — perhaps below 3 percent, some economists have forecast — officials may weigh the cost of raising prices against their other big goal: fostering a strong job market.
The Fed’s tasks are both price stability and maximum employment, which is referred to as its “dual mandate”. When a target actually goes wrong, it is prioritized the way the Fed conducts policy, But once they’re both close to the target, chasing both is a balancing act.
“I think we need to get a 2-handle on core inflation before we’re ready to put the dual mandates next to each other,” said Julia Coronado, economist at Macropolicy Perspectives. Forecasters in a Bloomberg survey expect the measure of inflation to fall below 3 percent in the spring of 2024 — what economists call the “2-handle.”
Mr. Powell has regularly said that “without price stability, we will not be able to achieve a sustained period of strong labor market conditions that benefit all,” explaining why the Fed needed to damage its prized job market. Might be possible.
But at his June press conference, he seemed a bit more optimistic — and since then, there has been evidence to bolster that optimism.
“I think the labor market has surprised many, if not all, analysts over the past few years with its extraordinary resilience,” Mr. Powell said.